Three Dog Bakery refits business plan, gets treats

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Friday, April 10, 2009 | Modified: Monday, April 13, 2009, 6:00am CDT

Kansas City Business Journal - by Suzanna Stagemeyer Staff Writer

Christy Howard, an event planner for 14 years and owner of five mastiffs, had long dreamed of running a Three Dog Bakery.

In July, after leaving her company, Howard and her husband opened the first of eight planned stores in the Dallas/Fort Worth area. But getting to that point required passing a huge unforeseen hurdle — securing financing.

“Our personal balance sheet was great, but it’s a challenge when you have a company that’s established but not doing well on the bank side,” said Howard, who had to put up more cash than expected for the first store.

That’s because Three Dog Bakery, for all its devoted followers, had never turned a profit. But after a two-year overhaul, 2008 marked “the first year of measurable profitability in the company’s history,” said Scott Ragan, president and “chief dog lover.”

The profitability, in turn, will make it easier for franchisees to fetch credit amid a doggedly slow economy and help Three Dog Bakery meet aggressive expansion goals.

Ragan, accompanied by silent investors, took the leash of the Kansas City company in late 2006. They planned to maintain the essence of the brand but apply an overlay of business knowledge — Ragan had been a vice president at H&R Block Inc. — to a company forged from entrepreneurial passion.

In early 2007, Three Dog had 47 bakeries worldwide and planned to open 15 that year. The initial revenue growth target was 25 percent a year. But grooming the company for that growth took more time than imagined.

The investors, which brought in a new management team, soon discovered that the company lacked the infrastructure to support a growing business, from the computer system to the supply chain to the baking and packaging equipment.

Last year, they switched from a more distant trademark license relationship with store operators to a franchise model, which requires more of both parties. The company would offer a solid system, processes, training and products; franchisees would be expected to manage successfully.

That has created some turnover among operators. Three Dog opened nine bakeries last year and has opened a new bakery in January and February. But about six have closed, with a few more expected this year.

“Absolute store count has not grown as fast as we’d originally anticipated,” Ragan said, though the company’s current 50 stores are better-performing than before.

The company plans an opening in May and June but would like to open two to three a month.

Revenue grew 17 percent in 2007 and 38 percent last year, coming in between $10 million and $15 million. The company posted more than $1 million in earnings before interest, taxes, depreciation and amortization.

Three Dog launched a new, contemporary store design at the end of 2007, which about 15 bakeries have adopted. It is better lit, offers more space — about 1,500 square feet, compared with the company’s 700-square-foot Country Club Plaza store — and includes new signs, new packaging and a greater bakery presence. Stores are built in a warehouse, then packed, shipped and set up at a new site in three days.

Sites are in upscale, lifestyle shopping centers rather than neighborhood locations as in the past, and franchisees must be business-minded people who also like dogs, not just dog lovers.

“Generally, the new stores are selling two to three times as much as the old (trademark license) stores,” Ragan said.

Franchise agreements usually offer an exclusive on a market for multiple locations to be opened in three to five years. Including franchise fees, a store typically costs $250,000 to $300,000, Ragan said.

Howard, who said she was Three Dog’s first multiunit franchisee, gets corporate marketing and media, graphic design, training and legal help.

“I feel like I got a lot more than I paid for,” she said.

Three Dog is looking for a Kansas City franchisee whose job will include choosing a new, larger Plaza store to replace the current, company-operated one. Ragan also envisions bakeries at Leawood’s Town Center Plaza, in the Northland and in Lawrence.

The gruff economy hurts and helps Three Dog. More people, disenchanted by corporate work, express interest in franchising, but financing is hard to find, Ragan said.

Individual bakery performance depends most on the product mix and the bakery, Ragan said.

Howard said her store averages low double-digit growth month to month.

“It was a little scary — right as we were opening, the economy started going down,” she said. “But our sales have gone up every month.”

According to the International Franchise Association, franchises will shrink by 1.2 percent, or 10,000, this year, primarily because of the credit crunch. Early in this decade, the number of franchise businesses rose by an average 5.6 percent a year. That slowed to 2.1 percent last year.

U.S. pet food sales are expected to reach $17.4 billion this year, up 3.6 percent from $16.8 billion in 2008, according to the American Pet Products Association.

Three Dog plans for continued revenue growth in 2009 and 2010, though it won’t be easy.

Ragan tells his staff that there’s a “big storm brewing, and we’re a fairly small little boat.”

“That doesn’t mean we’ll sink, but we need to chart our course,” he said.

sstagemeyer@bizjournals.com | 816-777-2203